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Voluntary measures to scrutinise pre-pack sales to connected parties have not been enough to alleviate creditor concerns, says the Government. A new regulatory framework governing connected party sales in administration will be put in place before the end of June 2021. Draft regulations were published on 8 October 2020.
The proposed regulations will apply to any sale of the whole or substantially the whole of a company’s business to a connected party that takes place within eight weeks of the company entering administration. Administrators will not be able to complete such sales without either creditor consent or an independent written opinion on the sale obtained by the connected party purchaser.
The Government will also be working with the industry to prepare guidance on the new regulations and on the administrator’s reporting requirements.
A pre-pack is the sale of the business and assets of a company which is negotiated before it enters an insolvency process, and then completes immediately on appointment of (usually) administrators. Pre-packs have been tainted by the perception that they are not always in the best interests of the company’s creditors. This is particularly the case where the purchaser is connected to the insolvent company or its directors.
The Graham Review was an independent review of pre-packs carried out in 2014. It concluded that, although pre-packs were a valuable tool for business rescue, there was often a lack of transparency around the terms, which left secured creditors in particular feeling aggrieved. It recommended a package of voluntary industry wide measures to address these issues, including:
These measures were introduced in 2015. At the same time the Government was given the power to legislate to restrict or prohibit connected party sales in administration if the voluntary measures proved ineffective. Although the original power lapsed in May 2020, it was revived in the Corporate Governance and Insolvency Act 2020 and expires at the end of June 2021 unless exercised before that date.
The Government has carried out a review of the efficacy of the voluntary measures set out in the Graham Review. As well as looking at the data on pre-packs the Government has also sought the views of various stakeholders including insolvency practitioners and the RPBs.
The report concludes that the limited uptake of the option to refer connected party sales to the Pre-Pack Pool or to provide viability reviews means that creditor concerns about connected party pre-packs have not been addressed. While it does not find that there is a case to ban connected party pre-packs it does propose that further regulation is necessary to ensure that such sales receive the level of independent scrutiny recommended in the Graham Review.
The full report can be found here.
The draft regulations do not make referral to the Pre-Pack Pool mandatory. Instead they set out a framework in which either creditor approval or an independent written opinion is required before an administrator can complete a sale of the whole or substantially the whole of a company’s business and assets to a connected party within the first eight weeks of administration.
The proposed connected party purchaser will be required to obtain the independent written opinion which will state that either the case is or is not made for the sale. The administrator must consider the report, but does not have to follow its recommendations. Where the report advises against the sale but the administrator proceeds with it, the administrator will have to provide a statement setting out their reasons for doing so. The report will be sent to creditors and filed at Companies House.
It is not currently clear who will provide the report, or how the Government proposes to ensure consistency of approach. The draft regulations regarding qualification are rather circular - an individual will be qualified to provide the report if they believe that they have the requisite knowledge and experience to do so – and there is no further detail about what this knowledge and experience might be. We anticipate that more detail or guidance will be needed before these regulations come into effect in order to give stakeholders confidence that the process achieves the desired result.
The Government does not proposed to legislate for any of the other recommendations in the Graham Review. Instead, it will work with the industry and RPBs to prepare guidance to accompany the new regulations and to strengthen the existing regulatory requirements in SIP16.
The draft regulations have been published and can be found here. They have not yet been laid before Parliament but the Government intends to do so as soon as Parliamentary time allows. The power to make the regulations must be exercised before the end of June 2021. We will monitor the progress of this legislation.
TLT provides expert advice in all areas of restructuring and insolvency law and practice. If you would like to discuss any aspect of the issues raised in this article, please contact a member of our Restructuring & Insolvency team.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.
Contributor: Tessa Durham
09 October 2020